Financial service provider insolvency stays outside direct Section 7 action despite RBI operational restrictions

A financial service provider remains outside direct Section 7 insolvency proceedings because the Code excludes such entities from the definition of "corporate person" and instead provides a separate insolvency and liquidation mechanism under Section 227 and the 2019 Rules. RBI restrictions on fresh lending, investment activity, balance-sheet expansion, and access to public funds do not change that statutory character or make a direct financial creditor application maintainable. The special framework for financial service providers therefore remains the proper route for insolvency action, and the rejection of the Section 7 application was maintained.

---

---

Issues: Whether a financial service provider remains outside the purview of Section 7 insolvency proceedings despite RBI restrictions on lending and public-fund access and whether such restrictions enable a creditor to initiate CIRP directly against it.

Analysis: The definition of "corporate person" excludes a financial service provider, and the Code provides a separate mechanism for insolvency and liquidation of financial service providers under Section 227 and the 2019 Rules. The RBI order relied upon only restrained fresh lending, investment activity, balance-sheet expansion, and access to public funds; it did not convert the respondent into an entity amenable to a direct Section 7 application by a financial creditor. The adjudicating authority's view that CIRP against such an entity could proceed only in the manner contemplated for financial service providers was therefore upheld. The relied-upon High Court decision did not address the insolvency framework under the Code and did not assist the appellant.

Conclusion: The respondent continued to be treated as a financial service provider for the purposes of the Code, and a direct Section 7 application was not maintainable; the rejection of the insolvency application was /maintained.

Ratio Decidendi: A mere regulatory restraint by the RBI on the business operations of a financial service provider does not alter its statutory character or permit a financial creditor to invoke Section 7 directly, because insolvency proceedings against such entities must proceed only through the special mechanism prescribed for financial service providers.

---